What Will Happen to the Economy If We Raise the Minimum Wage?

Today, fast food workers in 150 cities in 33 countries all over the
world are protesting for higher wages and the right to unionize. In the
US, those workers are demanding a bump in their salaries from $7.25 —
the federal minimum wage — to $15. Meanwhile, horrified CEOs sputter
prophecies of economic doom on cable news, and researchers snipe about
methodology in academic journals.

The latest fight over the minimum wage in America is on, and it is ridiculous.

Convincing
publicly held fast food behemoths to more than double the base salaries
of its employees may be a pipe dream. But there's a
government-mandated, across-the-board minimum wage hike that actually is
on the table. A proposal from President Barack Obama and Congressional
Democrats would raise the federal minimum wage from $7.25 to $10.10 an
hour. That's a 39 percent increase, which sounds like a lot, but in real
dollars it would make the minimum wage about what it was in the late
1960s. Local campaigns are seeking even higher minimums in 23 states and
cities including Seattle, where a mayoral panel is debating a $15 minimum wage
to be implemented over several years. Business groups and economic
libertarians oppose the hikes and, in some cases, the legally mandated
minimum wage itself.

Aside from the moral and philosophical
dimensions of the issue, both sides argue that raising the minimum wage
would have sweeping effects on the economy. Proponents on the left say
it will help ease our worsening income inequality and stimulate consumer
spending. Last December, the progressive Economic Policy Institute
released a report claiming that Obama's proposal would create 85,000 jobs. The following month, 600 progressive economists signed a letter calling for the increase to $10.10 in part because it “could have a small stimulative effect on the economy.”

Meanwhile,
opponents on the right warn of higher prices, job losses, and
small-business collapse. Former McDonald's CEO Ed Rensi summed up this
viewpoint when he told
Fox News host Neil Cavuto last August that a $15 hourly minimum would
“absolutely” kill jobs, and that 15 percent to 20 percent of small
businesses would “go away.”

So who's right and who's wrong? Nobody and everybody.

“This
is a political debate, not an economic debate,” says Christopher
Thornberg, founding partner of Beacon Economics, an independent research
and consulting firm that advises local and state governments in
California. “You've got two groups of poseurs out there, one on the
right, one on the left, who claim to be doing real economic research.
But the answers have been handed down to them by their donors. What
you're really getting fed is a big pile of crap from both sides of the
fence.”

The economics of the minimum wage are complex enough, and
the historical record inconclusive enough, that economists can make
arguments either way. So they do.

A controversial February report
from the Congressional Budget Office (CBO) was widely publicized as
estimating that the $10.10 minimum wage would kill 500,000 jobs. But the
report actually said the net job loss could be anywhere from zero to 1
million — not exactly a helpful estimate. The CBOs conclusion wasn't
even based on original research — it was "synthesized" from existing
studies of state-level minimum-wage raises in the past. Some of those
studies found there were negative effects on employment. Some didn't.

While
nearly all economists accept the general (but not always true)
principle that increasing the price of something — in this case, labor —
results in fewer people purchasing it, low-wage employers don't have
that much payroll fat left to trim. In other words, staffs are already
extremely lean, workers are laboring at higher capacities than ever, and
someone will still have to flip burgers. “I think everybody who's
reasonable on the issue realizes that it doesn't really have all that
much of an impact," Thornberg says. "I look at Australia, where the
minimum wage is $19 an hour, and the economy is fine. They don't have
high unemployment, widespread small-business loss, none of that."

'You've
got two groups of poseurs out there, one on the right, one on the left,
who claim to be doing real economic research. What you're getting is a
big pile of crap from both sides.'

Rather than cutting
jobs, businesses employing low-wage workers offset wage increases in
other ways, says Michael Reich, professor of economics at the University
of California, Berkeley, and coauthor of one of the two studies on
which the CBO primarily based its estimates. When wages are higher,
employees stay longer in their jobs, and that saves employers the
expense of hiring and training new workers. “Employee quits fall
substantially in what are often 100 percent turnover industries.” Or, as
he put it in a piece on Politico, “We do not find evidence that raising the minimum wage kills jobs, but we do find evidence that it kills job vacancies.”

But
businesses will raise prices! Not really, actually — there's little
evidence of the kinds of across-the-board inflationary increases that
conservatives fear. “Restaurant prices increase on a one-time basis of
about 0.7 percent for each 10 percent increase in the minimum wage — not
enough to affect sales,” Reich says. “Prices do not increase by
detectible amounts in any other sectors.”

Let's say a Big Mac costs $5 now. Raise the minimum wage to $10.10, and it'll raise the price of the Big Mac to about $5.14.

If a higher minimum wage isn't going to destroy the economy, it's not going to be a magic pill, either.

“There's
only a fuzzy relationship between a wage rate and the income of a
family,” says Richard Burkhauser of Cornell University and the American
Enterprise Institute, one of seven economists invited to comment on the
CBO report before its publication.

Although about 16 million
workers would get a raise under the $10.10 proposal, some of those
workers are already making something near the new minimum, so the raise
would be extremely small. In addition, some of the workers live in
households that are already above the poverty line — teenage children of
working parents, for instance. And in some poor families, the
wage-earners already make more than $10.10 an hour when they're working.
The problem is that they aren't working enough.

“If you care
about the working poor having enough income, just affecting that wage
rate is not a very effective way of increasing the income of the people
that you want to most help," Burkhauser says. "There's a much better way
to reduce poverty that will have no negative employment effects: the
Earned Income Tax Credit.” The EITC is the federal program that pays a
refundable tax credit to the lowest-income households, especially those
with dependents.

Along with the much-touted projection of 500,000
jobs lost, the CBO report estimates that, on balance, about 900,000
people (or roughly 300,000 households) would be lifted out of poverty by
a $10.10 minimum wage. Which is great, but that's less than 2 percent
of the 47 million Americans who currently live in poverty.

“[The
CBO's] best judgment was that it would have a modest negative effect on
employment and a modest positive reduction in poverty rates,” Burkhauser
says. “So while I agree that the minimum wage is not going to be a
disaster that will throw multiple millions of people out of work, it's
also not going to be very effective in fighting poverty. We have much
better mechanisms for doing that.”

Raising the annual
income of the lowest-paid workers to $20,200 is not exactly going to
narrow the gap between them and the 1 percent.

“This has nothing
to do with the Koch Brothers and the Romneys of the world,” Thornberg
says. “Don't pretend for a second that this is going to fix inequality
problems.”

Most anything that would potentially fix those
problems isn't currently politically feasible in the US. As a symbol,
as an ideological tenet, and as a point of principle, raising the
minimum wage remains a subject of passionate debate. Which is not to say
it would be without consequence — it will certainly affect many
low-wage workers and the small businesses that employ them. But when it
comes to the economy as a whole, don't expect a higher minimum wage to
change much of anything.

“I don't think the center of this should
be the macroeconomic debate,” Thornberg says. “The center should be, is
there a group of people out there who really deserve a leg up? I think
the answer is yes. But I can't believe the junk that comes out on both
sides of this thing."

As a customer of establishments that have minimum wage workers, I am willing to forego patronizing said establishments if they do not pay a living wage. I'm willing to pay more for services and products, but I'm not willing to pay exorbitant prices to pay upper managements ridiculous salaries, reasonable for their skill, education, and experience, yes, but not lottery winning type compensation.